June 25, 2007
ANXIOUS BULLS & CONFIDENT BEARS
The Federal Reserve's FOMC meets again this week to decide what's next for the price of money. Judging by Fed funds futures, more of the same is what's next, which is to say more of letting it ride.
The July contract is priced in anticipation that Fed funds will stay at the current 5.25%. Looking at longer-dated contracts doesn't materially change the outlook. But no matter what the central bank decides on Thursday when it makes a formal announcement of its monetary policy, someone will be grumbling.
Ours is a moment of anxious bulls and confident bears. There's plenty to worry about, and yet encouraging news can still be found with minimal effort. As such, the casual observer of the American economic scene can be forgiven for feeling confused. On the one hand he's reading stories laced with references to hedge fund woes and subprime mortgages, real estate corrections, higher interest rates and warnings by some that the economy is headed for rougher waters. Adding to the worries is yet another rise in oil and gas prices, which is an equal-opportunity offender in reducing that all-important variable for economic momentum: disposable personal income.
At the same time, unemployment is a relatively slim 4.5% and weekly jobless claims, while not exactly low, have for some time remained in a holding pattern that can optimistically be called slightly elevated. Meanwhile, last month's report on retail sales suggests there's still plenty of get-up-and-go in the consumer sector.
"Seventy percent of Americans now say the economy is getting worse," observed Donald Lambro, a columnist at the conservative-minded Townhall.com. But he added that the sour outlook is "contradicted by a growing workforce, increased wages and household wealth, and a stock-market rally that has boosted worker-retirement investments."
Optimism, however, wasn't exactly dominating the thinking of one Paul Kasriel when he wrote earlier this month that the longer the Fed defers a cut in interest rates, the bigger his forecast of a drop in U.S. gross domestic product. The central bank, advised the director of economic research for Northern Trust, sees a rebound for economic growth in this year's second half, a prediction that informs its decision to keep rates steady. Kasriel isn't so sure, and so he counseled that a failure to lower the price of money will take a toll on the economy. Accordingly, he reduced his GDP forecast in early June for this year's second half to a meager 1.7% annualized real rate from his previous prediction of 2.25%.
Meanwhile, on Friday, an IMF executive said that whenever U.S. economic growth fell to around 2%, recessions have shown a nasty habit of following. That would seem to offer an iron-clad indictment of the future if one accepts the government's report that GDP in this first quarter rose a scant 0.6%. Last we checked, that's more than slightly below 2.0%.
But this time is different, added the IMF official: "We expect something of a soft landing, and the reason is because some of the other factors that you associated with recessions are not in place. Real interest rates, in particular, are actually quite low and unemployment, most importantly, is also very low. So we have, I think, the fundamentals that are needed, that we see as supporting the economy."
In other words, the IMF expects the U.S. economy will grow by 2% for all of 2007, and accelerate next year with a 2.75% rise. What's more, the Fed's current policy of keeping rates at 5.25% is just what the economy needs to deliver this modest but otherwise hopeful scenario, the IMF said.
More than a few investors apparently agree with the Fed's reading of the economic future, which we're told is one of better times ahead, if only modestly. Dissent hasn't been banished, but it's looking more defensive these days. Yesterday, The New York Times reported that Fed Chairman Ben Bernanke's star has risen sharply on Wall Street of late. "The real news," the paper of record informed, "is that financial markets now accept the Fed’s view of the economy and are no longer betting against it."
You can see whatever you want to see when it comes to the economy in 2007. There's room for all views. But in some respects, a few of the old rules still apply. That starts with the basic fact that even in a sea of competing predictions, dispatched continuously in the digital age, the future still has room for only one truth.
Posted by jp at June 25, 2007 9:48 AM
That's a great line..."the future still has room for only one truth."
Posted by: Phil Albitz at June 27, 2007 1:18 AM